Facebook announced in that a blog article Tuesday it was banning cryptocurrency advertisements in the platform entirely. The business said that many advertisements for cryptocurrency investment opportunities, like first coin offerings, wereldquo;not currently operating in good faith. ” Facebook has a point. Require Prodeum for example, a cryptocurrency startup that seemed online Thursday. By Monday, it had been gone.
Prodeum's 12-page white paper outlined strategies to build a database of fruits and vegetables on the Ethereum blockchain. That idea might seem odd, but it’s maybe not the very first of its kind. Prodeum asked investors to help increase up to 5,400 ether–about $6.5 million–in an ICO. But after amassing what looks like less than the price of 2 Chipotle burritos, Prodeum disappeared. The organization’s sparkly, professional-looking site was replaced with a single, trolling term: manhood.
A press release on both an NBC affiliate and also a New Jersey local news website vanished, along with Prodeum’s site, Twitter accounts, and Telegram station. Emails to rsquo & the startup;s customer support address bounce back. It feels like Prodeum–which sounds suspiciously like the urinary-tract disease medication Prodium–was yet another cryptocurrency scam.
'It’s easier to dupe someone into investing on your ICO in 2018 than your fake property business. '
It joins a long line. In April of this past year, there was Mumbai-based OneCoin, a once-lauded blockchain startup that was found for a Ponzi scheme–but not before its creators supposedly funneled at least 350 million throughout Germany. Afterward there was Confido, which disappeared after raising over $370,000. Don’t forget BitConnect, an anonymous cryptocurrency exchange that was accused of being a Ponzi scheme several times before it eventually shut down.
Not every ICO is a scam, and many cryptocurrency startups are legitimate. But the shady, mostly unregulated cryptocurrency investment landscape is littered with dozens of ventures that are deceptive. (They#x27;re also prone to hackers; greater than 10% of the3.7 billion raised through ICOs has been stolen or lost, according to a recent study in the accounting firm Ernst & Young.)
The cryptocurrency marketplace is ripe for scammers since it’s comparatively new, backed by a lot of hype, also involves complicated technologies. It’s easier to dupe someone into investing on your ICO in 2018 than your fake property company–and a good deal of people have. A cryptocurrency startup just wants a swanky site and also an official-looking white paper. There are also a good deal of solutions that will help streamline the process: It is possible to automate your token sale, or possess someone write fake news posts hyping your venture.
Confusion around blockchain technology also makes a lot of the populace a possibly simple mark. Blockchains are encrypted, distributed ledgers that operate without a central authority like a lender. The ledger itself is securely saved on many computers, so it can’t even be changed or hacked. The Ethereum blockchain–on which Prodeum depended–allows for much more complex applications to be built on top of it. Eth-Tweet, for example, is a decentralized microblogging service built on the Ethereum blockchain.
This’s where the ICO comes in. An initial coin offering lets you purchase a few of the tokens that electricity a particular application. When there were a WIRED Blockchain Application for example, users might pay one WIRED Reader Token so as to view an report. The WIRED Blockchain Application ICO would enable investors to get in on the tokens at a reduce price. The idea is that in the future, as demand for the program rises (and people read more posts) the price of the tokens goes up, allowing early investors to earn a profit.
To complicate matters further, blockchain startup founders frequently tell investors that theyrsquo;re not putting their money in something akin to a traditional security, but really into the tech itself. (It’s frequently unsure exactly what that means in practice.) And a few startups, like block.one–which raised over $700 million–claim the contrary, claiming that their tokens can’t really be used for anything at all.
Detecting Fool’s Gold
The precise provisions of an ICO are generally laid out in an accompanying white paper, which is frequently the only documentation that investors need to decipher if or not a new startup is a solid prospect. Plenty of ICOs raise millions of dollars in cryptocurrency without even using a working prototype of the software. Even when a demonstration is available, just savvy investors can really evaluate whether a program will likely be feasible. Many startups don't write their white papers themselves: The job is outsourced to providers that write the papers for them.
Prodeum’s white paper, now offline, clarified a system involving two distinct kinds of tokens. On the outside, it seems more legitimate than many genuine ICOs, even listing four blockchain experts allegedly involved in the undertaking. But among those people recorded, Petar Jandric, said on LinkedIn he had been a “victim of identity theft,” and wasn’t really involved in Prodeum. Vytautas KašėId, yet another expert recorded, tells WIRED his title was also stolen for its undertaking.
Even genuine ICOs are subject to other kinds of scams, like those involving market exploitation. There are numerous “pump and dump” schemes for example, where groups of traders on platforms like Telegram and Discord artificially inflate a cryptocurrency’s value. If you can’t even manage to manipulate the current market, there’s also constantly hacking. The Decentralized Autonomous Organization, as an example, famously raised $150 million within an ICO and then was hacked, leading to the reduction of $50 million. Plenty of other startups have faced similar fates.
The Wild West
Despite walking and talking like traditional stocks, ICOs have mostly avoided serious scrutiny from the Securities and Exchange Commission, the federal agency that regulates investment markets. Many blockchain startups are anonymous and international–which can set them from the SEC's purview. That lack of supervision is just another reason so many scams proliferate.
The SEC appears to have started clamping down on cryptocurrencies, however. In December, the bureau’s new cyber unit announced it had registered its own first ever complaint, contrary to the Canadian couple supporting the cryptocurrency startup PlexCorps. The agency alleges the couple swindled customers from $15 million by unrealistically telling them they could make around 1,354 percent returns on their investment.
'Fraudulent ICOs can be used to repackage old frauds in a new wrapper. '
Todd Kornfeld, Securities Attorney
On Tuesday, the SEC announced it had halted among the largest ICOs ever, for its Dallas-based startup AriseBank. The celebrity-endorsed company, which promised for a “decentralized lender,” falsely advertised that it may offer customers FDIC-insured banking accounts. The same day, Bloomberg reported that the US Commodity Futures sent a subpoena to Bitfinex and Tether, among the world’s largest cryptocurrency exchanges. Facebook's advertising ban, then, is only one of a set of efforts to clean up an unruly, scam-riddled system.
Ultimately, blockchain scams aren’t considerably different from other kinds of investment fraud. If you dress it up as a ICO or a hedge fund, the grift usually works exactly the same: Convince unassuming individuals that it is possible to make them wealthy, then steal their money. While the SEC has yet to aggressively go after a lot of this cryptocurrency marketplace, it does regularly record complaints against hundreds of other scams made to rip off people. Humans have been attempting to swindle each other from money for thousands of years. Cryptocurrencies are simply the most recent opportunity to do so.
“Fraudulent scams like Ponzi schemes and sponsors who pocket’s money have been in existence for a long time. Fraudulent ICOs can be used to repackage old frauds in a new wrapper,” says Todd Kornfeld, a securities attorney at the firm Pepper Hamilton.
That’s not going to mention the cryptocurrencies aren’t even a particularly unethical and volatile thing to invest at the moment. A recent hoax claimed that a guy scammed his way into over $1 million by convincing people Chuck E. Cheese tokens were bitcoins. The story wasn’t authentic, but you can see now why it had been so easily believed–the cryptocurrency market is full of lots of crazier scams.
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